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Globe and Mail: Royal Dutch says Shell Canada offer is fair

DAVID EBNER
Globe and Mail Update

CALGARY — Minority shareholders of Shell Canada Ltd. that are threatening legal action over a takeover offer from Royal Dutch Shell PLC don’t have grounds for a court case, Royal Dutch said Thursday.

Royal Dutch owns 78 per cent of Shell Canada and is offering $45 share for the rest, which some minority shareholders say is inadequate. I.G. Investment Management said on Wednesday that it and several other investors would take Royal Dutch to court if they are forced out at $45.

“Royal Dutch Shell thinks this is a full and fair price for the minority shareholders,” Alexandra Wright, a Royal Dutch spokeswoman, said in an e-mail to www.globeandmail.com. “This offer is being made with a recommendation from the Shell Canada board of directors, which has received a fairness opinion from the independent valuator. Accordingly, we don’t see any grounds that dissenting shareholders would have for litigation.”

On Monday, Shell Canada announced it was endorsing the $45 a share, or $8.7-billion, bid, after receiving a fairness opinion from CIBC World Markets Inc. that did work for an independent committee of Shell’s board. Royal Dutch initially offered $40 or $7.7-billion last October.

The offer is contingent on it getting more than 50 per cent of the minority stake.

Holders of at least 20 per cent of the minority shares say they won’t sell at $45, but with an unknown amount of short-term hedge fund money in the stock, Royal Dutch could prevail.

“Even if they [Royal Dutch] were to luck out and get 50 per cent of the minority, which may depend on how much hot money has gone into the stock, my view at this point is they’ll have to pursue us through the courts to force us out at $45,” said Dom Grestoni, a senior vice-president at I.G. Investment Management.

I.G. Investment holds 3.4 per cent of the minority shares.

“We’ll go as far as we have to go to prevent that from happening. We’ll fight back with whatever we have available to us,” Mr. Grestoni said. He indicated that other minority shareholders, such as Jarislowsky Fraser Ltd. and Bissett Investment Management, share the same view.

Stock of Shell Canada rose slightly, climbing 12 cents to $45.37, indicating some investors think there is a small chance of a higher bid from Royal Dutch.

A court challenge hasn’t been planned yet because a strategy cannot be developed until Royal Dutch issues its takeover bid circular, which would outline its corporate restructuring plans, in early February. The likely basis for a court challenge by minority investors would be the “right to dissent,” a complicated avenue described in section 190 of the Canada Business Corporations Act, said a Calgary mergers and acquisitions lawyer who didn’t want to be identified.

A court case based on roughly the same argument is already under way in Calgary involving New York hedge fund Paulson & Co. and French oil company Total SA. Total bought oil sands junior Deer Creek Energy in 2005 for about $1.7-billion — $31 a share — and Paulson refused to tender its 16-per-cent stake, which it began acquiring when Total first made a move for Deer Creek.

Paulson was squeezed out eventually as Total conducted what’s called a “subsequent acquisition transaction,” but in court the hedge fund has argued that the fair value of the shares was more than $100. The trial began last September and extensive written arguments are being exchanged currently, with another hearing scheduled for February.

Dissenting minority shareholders usually have a tough time in court, given that most other investors sold at a certain price, the lawyer said.

“Generally the courts say, ‘Everyone else thought it was fair value,’ ” he said The big question is whether Royal Dutch can get more than half of the minority Shell Canada shares at $45. Jarislowsky, which owns about 16 per cent of Shell Canada, is among the group that rejects $45 a share.

“This is part of the way this process works, when you’re dealing with a controlling shareholder taking out minorities,” Len Racioppo, president of Jarislowsky, told The Globe and Mail on Tuesday. “They make their bid. They get stock placed in some short-term shareholders’ hands, like the hedge funds, and then they see what they can do.”

For hedge funds that bought the stock at about $40, a price such as $45 may be attractive, given that Shell Canada could fall sharply if Royal Dutch revokes its offer. The stock was trading at about $30 when Royal Dutch made its first bid.

Amid the takeover manoeuvring, Shell Canada outlined bigger plans for the oil sands, looking to eventually mine 770,000 barrels of bitumen a day, more than a previous goal of about 550,000 barrels and close to five times higher than the design of the company’s existing Athabasca mine of 155,000.

Shell Canada also described plans to increase oil sands upgrading capacity near Edmonton to handle 700,000 barrels of bitumen a day.

Dissident minority shareholders believe Shell Canada is worth $50 or more a share, in part because of what they see as the company’s long list of attractive future projects.

“We’d be quite happy sitting back and reaping the benefits for the next 10 years,” Mr. Grestoni said.

Royal Dutch’s $45-a-share offer was endorsed by Shell Canada’s board of directors after an independent financial analysis was conducted.

Clive Mather, Shell Canada’s chief executive officer, said Wednesday’s expanded oil sands plans were considered in the financial analysis.

“The [oil sands] announcement we made is consistent with the business plans that we have had and have been part of any consideration of value,” Mr. Mather said in an interview to discuss Shell’s fourth-quarter results. Those numbers were also announced Wednesday, with Shell’s 2006 profit coming in at $1.74-billion or $2.11 a share, down from $2-billion or $2.43 in 2005 because of lower natural gas prices and lower output in the oil sands due to planned maintenance.

Shell Canada owns 60 per cent of the Athabasca oil sands project, with Western Oil Sands Inc. and Chevron Corp. holding 20 per cent apiece.

The first 100,000-barrel expansion is under way — 2,400 construction workers are on the job — which could cost as much as $12.8-billion.

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